Moody’s: Brace for emerging markets volatility

At Moody’s annual Emerging Markets Summit on Monday, financial markets experts discussed the rocky road that emerging markets face as they emerge from the economic upheaval of the pandemic. As policymakers coordinate their response, experts weighed in with their views on debt defaults, financial volatility and the gap between emerging markets and advanced economies.

Here are some of the key takeaways from the event’s first day:

On the prospects of further financial volatility in emerging markets

“In 2021, as the markets start worrying about inflation, particularly in the US, there will be episodic tightening of interest rates, and that will arrest capital flows to emerging markets. So you will see financial turbulence for emerging markets. Second…central banks are already raising domestic rates because of domestic inflation, so that leads to tightening conditions, in particularly in emerging markets. This pathway from recovery to expansion will be paved with financial volatility for sure.”

Atsi Sheth, managing director, credit strategy and research; global head for emerging markets, Moody’s Investors Service

“For emerging markets we believe we will see more episodes of financial market volatility this year and next. Two dynamics are playing out – first we’ll see a widening gap in the pace of recovery between the US and emerging markets as the US pulls ahead with vaccinations and the pace of recovery and as emerging markets lag at various paces. Second we will likely see periodic inflation and rate worries in US markets given the large fiscal stimulus and pick up in recovery itself, so both of these will likely result in episodes of market turbulence for emerging markets. The risk of tightening financial conditions will be a key risk for emerging markets for this year and next.”

Elena Duggar, associate managing director, credit strategy and support; chair of Moody’s Macro Board, Moody’s Investors Service

On emerging market debt fears

“The fiscal space in emerging markets has really been eroded enormously, the level of debt that has been incurred over the last two years, after incidentally seven previous years of accumulation, has made the breathing space significantly low. The baseline is still that monetary accommodation globally remains well behaved, debt levels in emerging markets can be financed…but the risks around emerging markets have increased and the vulnerability of emerging markets whose debt levels have increased significantly have become higher. It becomes incumbent on policymakers in emerging markets to pre-emptively tighten and deal with their fiscal houses, otherwise if we’re wrong and interest rates globally do rise, emerging markets are in a world of pain…it may not be something we have to deal with immediately, but over a period of number of years, not decades, we have to deal with that problem. The debt overhang is already with us.”

Amer Bisat, managing director, head of sovereign and emerging markets, BlackRock

On the chances of further emerging market debt defaults

“Last year we saw 6 defaults compared to 1-2 in the previous 30 years. That said we did not see a wave of emerging markets defaults and we don’t expect to see one. We could still see elevated defaults in 2021 given all the risks but we don’t think we’ll see a widespread wave of defaults and to a large extent this is due to the large amount of policy support provided by governments, central banks, and international organisations. And a large part is driven by the fact that for larger emerging markets financial conditions have recovered from the shock of 2020…But in a number of countries in Africa, MENA, the Caribbean, you see a U-shaped pattern of debt affordability metrics, external vulnerability metrics, so the risks are definitely rising going forward.”

Elena Duggar

‘The pandemic remains in the driving seat’

“The economic recovery will be very uneven across emerging markets. We expect Asia to lead the recovery, followed by Latin America and emerging Europe, while the Middle East and Africa will lag. But the recovery will be very uneven across sectors, we don’t expect travel and tourism to fully recover for another two years and that mean economies dependant on tourism will remain vulnerable. There is a bright spot which is recovery in oil and commodity prices which will offer some respite. But uncertainty remains high and risks are to the downside both for the economic recovery and the recovery of government revenue. The situation in India and hard-hit Latin American economies is a keen reminder that the pandemic remains in driving seat and will be in a lot of emerging markets for this year, next year and potentially the year after.”

Elena Duggar